Tim Hext: RBA heads back to neutral. But where is neutral? | Pendal Group
Hi there! Welcome to the new look Pendal website... Take a two minute tour to see what we’ve changed.

Mainstream Online Web Portal

Investors can view their accounts online via a secure web portal. After registering, you can access your account balances, periodical statements, tax statements, transaction histories and distribution statements / details.
Advisers will also have access to view their clients’ accounts online via the secure web portal.

Tim Hext: RBA heads back to neutral. But where is neutral?

The Reserve Bank considers a neutral rate around 2.5% and a bit. But how much is the bit? TIM HEXT has some answers

IT’S BEEN clear for a number of months that the Reserve Bank wants rates back to neutral sooner than later.

Quite simply nothing about high inflation and low unemployment cries out for expansionary rates.

Governor Phil Lowe has implied he would like to see neutral rates by year-end — and he considers neutral around 2.5% or slightly higher.

I was therefore quite excited to see the RBA has been working on “what is neutral” and whether it’s changed since the pandemic.

They referenced this work in this week’s RBA minutes, but the contents will have to wait for public release at a later date (we hope).

Find out about

Pendal’s Income and Fixed Interest funds

The concept of a neutral cash rate is very fluid to begin with.

The best notion is a rate that reflects long-term inflation expectations plus any adjustment for productivity.

That is, you should expect your cash returns through the long-term cycle to keep pace with inflation and (assuming positive productivity) deliver some small extra return.

This leads to the notion of 2.5% (the RBA target) plus a bit.

The size of that “bit” becomes crucial — and for that we need a view on productivity.

There are many reasons and views on why the last decade has seen poor productivity growth (less than 1%) and cash rates have been at or lower than inflation.

The neutral rate was roughly the inflation rate as evidenced by cash rates stuck at 1.5% from 2016 to 2019 — just below inflation at the time.

Have we experienced, as with many things, a Covid reset that changes this outlook for productivity?

Adviser Sam is invested
in making our world

A better place.

Watch as Sam meets a
mum rebuilding her life
thanks to responsible
investing

That question will be answered in time, but there are some positive signs.

Firstly, business lending is strong. Private sector credit is nearing double-digit growth (currently 9%) for the first time since the mining investment boom more than 15 years ago.

And it’s not just housing driving it. Labour shortages are playing into the idea of replenishing capital stock and using existing labour more efficiently.

Secondly, Covid-driven supply shortages have seen businesses and households rethink efficiencies, whether reducing commuting or streamlining processes.

Against this, of course, are the challenges of reduced globalisation and sustainable energy. Both of these, though necessary to meet other challenges, introduce potentially less productivity at least in the medium term.

As investors, a return to positive real yields should be seen as an encouraging sign that demand for money is picking up again.

Businesses see productive uses for borrowing. While higher cash rates in response may reduce longer-term valuations for assets, it is not a sign of imminent recession as some risk markets are now pricing.

Investors should welcome news that a risk-free asset can not only keep pace medium term with their cost of living, but also earn a return above that — something not seen for a decade.


About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at July 21, 2022. PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Keep updated
Sign up to receive the latest news and views